Martin Midstream Partners L.P. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited results; dollar figures below are in millions unless stated otherwise. The Partnership operates four Gulf Coast-focused businesses: terminalling and storage, natural gas services, sulfur services, and marine transportation.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $174.5 | $226.0 | $590.5 | $782.5 |
| Operating income | $9.2 | $12.0 | $43.8 | $56.4 |
| Net income (loss) | $(0.9) | $3.3 | $13.8 | $31.5 |
| Limited partners’ earnings (loss) per unit | $(0.03) | $(0.02) | $0.16 | $0.54 |
| Operating cash flow | Not separately provided | Not separately provided | $61.7 | $113.0 |
| Adjusted EBITDA | $33.3 | $41.4 | $124.2 | $136.8 |
| Distributable cash flow | $19.9 | $29.1 | $77.9 | $98.1 |
Operating margin was approximately 5.3% in Q3 2016 versus 5.3% in Q3 2015, and 7.4% for the first nine months of 2016 versus 7.2% in 2015. Interest expense, net, was $11.8 million for the quarter and $34.0 million year to date, compared with $12.0 million and $32.5 million, respectively.
- Cash flow and investment: Nine-month operating cash flow fell 45% year over year. Investing used $10.1 million; capital expenditures and plant turnaround costs totaled $28.6 million, down from $46.3 million. Financing used $51.7 million, including $100.1 million of cash distributions.
- Balance sheet and liquidity: At September 30, cash was $0.01 million, current assets $239.9 million, current liabilities $113.5 million, and partners’ capital $310.9 million. Long-term debt, net, was $913.5 million. Revolver borrowings were $549.0 million, with $114.6 million of nominal facility availability after letters of credit; the Partnership said covenant capacity allowed only about $8 million of additional borrowing.
- Debt terms: The $664.4 million revolving facility was amended in April 2016, extending maturity to March 2020 and reducing capacity from $700 million. Its weighted-average interest rate was 3.53%. The $400 million senior notes bear 7.25% interest and mature in 2021. The Partnership reported compliance with covenants at quarter-end, while noting leverage was near the maximum permitted.
Material changes versus prior period
- Revenue declined 23% in Q3 and 25% year to date. Lower NGL sales volumes, weaker throughput and lower commodity-linked product prices were key factors.
- Year-to-date net income decreased to $13.8 million from $31.5 million; Q3 shifted to a $0.9 million net loss from $3.3 million income. Year-to-date results included a $4.1 million marine transportation goodwill impairment.
- Marine transportation remained under pressure from excess inland barge capacity and lower fleet utilization. Nine-month segment operating loss after eliminations was $5.5 million, including the goodwill impairment and asset-disposal losses.
- Working capital was a significant cash-flow headwind: inventory rose to $107.5 million from $75.9 million at year-end, while the filing attributed $38.1 million of the operating cash-flow decline to an unfavorable working-capital variance.
- Cash distributions during the first nine months totaled $100.1 million. The Partnership declared a Q3 distribution of $0.50 per common unit, equivalent to $2.00 annualized.
Outlook, risks and unusual items
- Asset sale: After quarter-end, the Partnership agreed to sell Corpus Christi crude-oil storage, refined-product terminal, pipeline, dockage and related assets to NuStar for $107 million gross consideration. It expected approximately $93 million net proceeds, anticipated closing before year-end 2016, and planned to apply proceeds to revolver borrowings. A gain was expected; the sale had not closed as of the filing.
- Management outlook: Management said it had reduced planned growth capital spending to preserve liquidity and expected operating cash flow and borrowing capacity to cover 2016 working capital, maintenance spending and scheduled debt payments. It expected seasonal NGL inventory sales and the asset-sale proceeds to improve leverage, and expected covenant compliance at December 31, 2016.
- Operating and market risks: Sustained low or volatile commodity prices may reduce drilling, volumes, throughput and utilization. The filing also cites excess marine capacity, competitive pressure, seasonal NGL and fertilizer demand, and potential weather impacts.
- Interest-rate exposure: A 100-basis-point rise in rates on floating-rate debt was estimated to increase annual interest expense by approximately $5.4 million. A $0.10 change in expected NGL hedge settlement prices was estimated to affect net income by $1.9 million.
- Regulatory and legal matters: Shippers challenged WTLPG rate increases; the Texas regulator directed that pre-increase rates remain in effect during the proceeding. The Partnership also disclosed a lease dispute and a customer demand for defense and indemnity related to motor-oil marketing lawsuits; potential exposure was not determinable. Management did not expect ordinary-course legal matters in aggregate to have a material adverse effect.
- Related-party reliance: Martin Resource Management controls the general partner, supplies employees and services, and is a significant customer and supplier. It accounted for approximately 14% of nine-month revenue in 2016. The Partnership also held a $15 million note receivable from an affiliate bearing 15% interest.
Most important facts for investors to verify
- Whether the NuStar transaction closed on the expected terms and whether net proceeds were used to reduce revolver borrowings as planned.
- Subsequent leverage, covenant headroom and available borrowing capacity; nominal revolver availability materially exceeded covenant-based availability at quarter-end.
- Whether seasonal inventory liquidation and working-capital changes improved operating cash flow and liquidity.
- Distribution sustainability relative to distributable cash flow, debt service and capital requirements.
- Trends in NGL volumes, terminal throughput, marine fleet utilization and sulfur margins, together with the outcome of the WTLPG rate proceeding.
- Any developments in the disclosed legal matters and the affiliate relationships, including collection and repayment terms for the $15 million note.